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To Compete with Robos, Advisers Must Become Financial Physicians

This post originally appeared on Enterprising Investor on 13 April 2017.

It is an all-too-common refrain these days: Can robo-advisers replace human advisers?

Not if the goal of the relationship is to increase clients’ well-being, says Meir Statman. Why? Because that requires human interaction.

This is an intriguing perspective coming from Statman, the Glenn Klimek Professor of Finance at Santa Clara University and author of Finance for Normal People: He is well known for his research on behavioral finance and sits on the advisory boards of various wealth management publications. And he is a member of the investment advisory board of Wealthfront, the $5-billion digital advice platform founded by Andy Rachleff.

“Andy Rachleff says the idea [of robo-advice] is to . . . make financial advisers as obsolete as travel agents,” Statman told a roomful of advisers at the 2017 CFA Institute Wealth Management Conference. “That will be the case if you try to compete with robo‑advisers head-to-head. You have to build on your value-added, that human touch, that emotional intelligence, that role of a minister, of a priest, imam, rabbi, teacher. That is way more than just doing pie charts.”

These skills are especially important in the decumulation phase, when clients’ priorities may start to shift.

Communication: Separating Bots from Beings

“You do what no robo‑adviser does: You ask, you talk with your clients, you listen to them, truly listen,” Statman told the audience. “You empathize, you diagnose, you educate, you treat, and all over again, because they will forget what you have done for them.”

Statman likes to think of the work of a financial adviser as akin to being a “financial physician.”

“They want to tell you,” Statman said. “Your clients want to tell you, if you let them, if you help them tell you what it is that they want, what it is that they fear. When you do that, you will increase their well‑being immensely. You will increase yours, because you will get their gratitude, and you will get also to keep them as clients.”

Statman sees wealth accumulation and decumulation as two sides of the same coin — it is just as important for an adviser to offer wise counsel on the spending of the wealth as it is on the building of the wealth.

“Wealth Is for Well-Being”

“What is wealth for?” he asked. “Wealth is for well‑being. After all, you cannot take it with you.”

The problem, according to Statman, is that the same tools that help in accumulation — such as framing or mental accounting — stand in the way of decumulation.

“There is such a thing as too much self-control.” Statman said. “We put money into two major accounts. One is income, and the other is capital. The rule is: ‘Spend income, but don’t dip into capital. Reinvest your dividends, don’t spend them.’ This helps us, but keeping those boundaries between income and capital in that rule can get in our way.”

Before we had Excel spreadsheets and other software programs to help us keep track, people would separate money into jars — what we tend to think of as separate “buckets” of money.

“Framing money into what is income, what is capital, what is money for utilities, what is money for vacation, and so on, helps us when we accumulate,” Statman said. “We would like to go on vacation, but the money is in an account that is dedicated to our kids’ educations. We are going to feel horrible if we dip into this account for the vacation, so we don’t, and we leave that account to accumulate.”

This is a flawed approach in the decumulation phase. “Because people want to maintain that boundary between income and capital, when it is time for them to, in fact, spend from their capital, they find it difficult, impossible to do,” he said.

Also, some people experience powerful feelings of regret when it comes to spending.

“Dealing with clients’ aversion to regret by dipping into capital in regular intervals . . . is really an important job,” Statman said. “The trait that helps us save gets in the way. Conscientious people save. Conscientious people come to meetings on time. Conscientious people who make a promise deliver on that promise. They have wonderful self‑control. The problem is that they cannot let go.”

Act as a Financial Physician

This is where the flesh-and-blood adviser has an advantage.

“You are not a robo‑adviser,” Statman told the audience. “Your advantage is not in beating the market. Your advantage is not in pie charts. Your advantage is in creating this bond, this emotional bond, with your clients, to serve them as a financial physician to increase their wealth, but more important, to increase their well‑being . . . You help them accumulate responsibly, and now you can help them decumulate responsibly.”